Why leftovers seem sensible

If you've failed to save for years, you may have decided that you're hopeless with money. I don't think you are. The leftover plan is what almost everybody does by default, and it rests on reasoning that sounds sound.

It puts obligations first. Rent, bills and food are necessities, and savings are optional. Paying for the necessary things first and the optional one last seems like the responsible order. It's how most of us were taught to think about money.

It keeps you flexible. You don't know at the start of the month what the month will bring. Committing two hundred pounds on day one, when you might need it on day twenty, feels rash. It seems wiser to wait and see.

It feels honest. Saving what's left means saving what you can truly spare. Moving money at the start feels like pretending to have it.

It avoids a small unpleasantness. Moving money out of your account on payday means seeing a smaller balance straight away. Nobody enjoys that, and the leftover plan postpones it for a month.

And it involves no effort. There's nothing to set up and nothing to decide. You carry on as you are and hope.

Economists have a name for the pull behind the last two of these. Ted O'Donoghue and Matthew Rabin call it present bias. In their account, people give extra weight to whatever is happening now, compared with how they'd weigh the same thing if it were in the future. One consequence is that tasks with an immediate cost and a delayed reward get put off. Saving is exactly such a task. It costs you something today and the benefit comes later. People who are, in the authors' word, naive about their own tendency keep expecting to do the costly thing tomorrow, and tomorrow they expect it again. Their paper is a piece of economic theory and not a survey of savers. But it describes the leftover plan closely. The plan is a standing arrangement to do the saving later.

There's a second idea from economics that I'll lean on throughout this book. Hersh Shefrin and Richard Thaler proposed that households don't treat all their money as one interchangeable sum, though textbook economics says they should. People divide it into mental accounts. In their scheme there are three, which are current income, current assets and future income. The temptation to spend is greatest for current income and least for future income. Your pay, sitting in your current account, is current income. In your own mind it's already marked as money for spending. The three hundred and forty pounds in the savings account is marked differently, and that's why it's survived at all.

Underneath the leftover plan are needs nobody should be ashamed of. You want to meet your obligations. You want room to cope with a month that goes badly. You don't want to feel squeezed. And you do want to save. The question for the next several chapters is whether the leftover plan serves any of these. I'll argue that it fails the last one completely. I'll also argue that it serves the second, the wish for room to cope, much worse than the alternative does.